Why do prices keep rising – even when productivity increases? And who really controls the money supply?
In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Ivan Pavlovic, author of Making Money on the Money Printer. Together, they explore the hidden mechanics behind inflation, how monetary policy shapes the economy, and what individuals can do to protect their financial future.
In this episode, you will learn:
- Why inflation is more than just rising prices – and how it’s rooted in money supply expansion.
- How central banks and commercial lenders create money, and why it’s not just governments pulling the strings.
- The role of interest rates in financial instability and what causes economic booms and busts.
- How asset bubbles form, and what savvy investors can do to stay ahead of the cycle.
- And more!
Tune in to discover how you can protect your wealth when the value of money keeps falling.
Resources:
Making Money on the Money Printer | Follow Ivan: X | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth, this is your host Marc Bautis. Today we’re diving into a topic that’s more relevant than ever: how inflation and monetary policy shape our financial lives – often in ways most people don’t fully understand. We’ll explore the mechanisms behind inflation, why prices seem to rise relentlessly, and what investors can do to protect and grow their wealth in today’s economy.
Joining me is Ivan Pavlovich, author of the book Making Money on the Money Printer. Ivan has lived in various European countries and has closely observed how economic systems affect everyday people – particularly the poor and middle class – even in some of the world’s wealthiest nations. His book unpacks the fundamentals of economics and the monetary system, offering a critical look at how government policies and inflationary forces shape our economy and investment landscape.
Ivan, welcome to the show.
Hi Marc, thank you for having me.
To start off, what inspired you to write Making Money on the Money Printer?
I’m still relatively young in my career — I’m 34 — and I moved from Croatia to Luxembourg when I was 25. Luxembourg is one of the wealthiest countries in Europe, but after living there for six years, I noticed that many people, even locals, were struggling financially. The same was true back in Croatia. A lot of people my age couldn’t afford even a small apartment on their own income.
That’s when I started digging into economics. I work in the financial sector — I got into finance early on, even though I studied law — so I had some exposure to how money works through my job. But I also began learning about economics and investing on my own, because schools do a poor job of teaching this.
Eventually, one thing led to another. I started with online resources — I’m grateful for the internet, since my parents’ generation didn’t have access to so much free knowledge — and then I got deeper into books. I found myself drawn to Austrian economics in particular.
I approached the subject as a layman, looking for practical insights and trying to understand what was really going on. I wanted to figure out how I could break through financially, and I think many people feel the same way.
We’re told to study hard, get a good job, save, and eventually things will work out. But for most people, that formula isn’t working anymore. What’s worse, many end up blaming capitalism, seeing a small group getting richer while everyone else stagnates or declines.
After educating myself, I decided to write the book to help friends, family, and anyone else who wanted to understand these issues better.
Understanding What Inflation Really Is
Inflation is obviously a timely topic. I recently heard someone comment on the rising price of eggs, wondering if chickens had stopped laying them. So maybe we can start at a high level — what is inflation, and what causes it?
That’s a great place to start because it’s so important to understand. In mainstream media, you hear terms like inflation, disinflation, and shrinkflation thrown around all the time. But when they say “inflation,” they’re usually just referring to price increases. That’s not the original definition.
Historically, inflation referred to an increase in the money supply. Prices can go up or down based on supply and demand, but when the supply of money increases, you essentially create more demand — because every transaction uses money to purchase goods or services. When more money is chasing the same amount of goods, prices tend to rise.
This is where things get confusing. Some argue that increasing the money supply doesn’t always cause prices to rise. There are times when money supply grew significantly but prices still fell. That’s true, and here’s why.
First, the global economy is very interconnected. The U.S. dollar, for example, is the world’s reserve currency. It’s used widely in international trade and debt. So when the U.S. inflates its money supply, those dollars don’t always stay in the U.S. economy. They can flow out to other countries, which means you might not see an immediate increase in domestic prices.
Second, technological progress improves efficiency. If it used to take four hours to produce something and now it takes two, that reduces costs and can lower prices. This innovation offsets some of the upward pressure caused by more money in circulation.
Another thing to understand is that while the price of a single product — like eggs — can rise due to specific factors like supply chain issues or disease affecting chickens, that’s different from general inflation.
Inflation, in the economic sense, refers to a widespread increase in prices across many goods and services. If prices across the entire economy rise by 2% or 5% in a year, the question is: why?
It’s not because Americans suddenly became less productive. It’s because the supply of money increased. That’s what we need to focus on when we talk about inflation.
Who Controls the Money Supply and Why
On the topic of money supply, who controls it? I assume it’s the government. Why would they inflate it, and how do they actually go about doing that? Most people think of interest rates, but are there other tools involved?
Great question. It’s commonly believed that the government controls the money supply directly, but really, the key players are in the banking sector. Banks play a central role in today’s money system.
In the past, money was typically a commodity — like gold or silver — that people trusted because it was scarce, durable, and hard to produce. Gold, for example, takes a lot of effort to mine and can’t be easily destroyed, which made it a good store of value.
When paper money was introduced, it was originally backed by these metals. Over time, banks and governments realized they could issue more paper notes than they had in reserves. That’s how the concept of fractional reserve banking began, where money supply could be expanded beyond the actual physical reserves.
Historically, emperors and kings controlled their kingdoms’ money supplies. If they needed more funds than taxes could provide, they would debase coins or create more of them. But today, inflating the money supply is much easier. Most of our money exists digitally — in computers or on our phones — not as physical cash or coins.
So when we talk about “money,” we’re really talking about currency — dollars, euros, and so on. Friedrich Hayek once said he regretted that “money” is a noun. He felt it should be an adjective — a quality rather than a thing. That’s a useful way to think about it. Many different things can act as money depending on their properties.
How Currency is Created and Why It’s Not Just the Government
Before 1971, the U.S. dollar was backed by gold, meaning you could exchange dollars for physical gold. But when President Nixon took the world off the gold standard, we moved to a system of fiat currencies — dollars, euros, and others — that trade relative to one another without any commodity backing them.
So who controls the supply of these currencies? It starts with the banking system, not the government. More specifically, central banks create what’s called reserve currency balances on the books of commercial banks.
These commercial banks then lend out money into the economy. When we talk about money creation, we’re really talking about this lending process. Ordinary banks, where people keep their savings, are the ones creating most of the currency we use.
Governments, for their part, can’t tax what doesn’t exist yet. So they typically borrow money first. To do that, the government issues bonds, which banks buy.
That transaction gives the government cash to spend, whether on salaries, pensions, or other programs. But the government has to repay that money to the banks with interest.
That interest comes from taxpayers — citizens who must now produce more than was originally borrowed in order to repay it.
Money is also created when individuals take out loans. If you go to a bank for a mortgage or a car loan, the bank assesses your credit and, if approved, creates new money by simply entering numbers into your account.
It’s not lending out existing funds; it’s creating new money that now enters circulation. But it too must be repaid with interest, which only works as long as new loans keep being issued. In this way, the system depends on continuous expansion of credit.
There’s also the Eurodollar system, which adds complexity. These are U.S. dollars created outside the U.S., usually by foreign banks. For example, I live in Europe and could potentially get a loan in U.S. dollars instead of euros. These offshore loans inflate the U.S. dollar supply, even though they’re created by banks outside the Federal Reserve’s direct control.
So it’s not just governments or even central banks that create money — it’s the entire global banking system, including shadow institutions, and no one really knows the total amount of dollars or euros in existence at any moment.
Why the U.S. Dollar Dominates Global Lending and Trade
Why would someone in Europe want a loan in U.S. dollars rather than euros?
It comes down to convenience and global usage. The U.S. dollar is the world’s reserve currency, so many international transactions — from Thailand to China — are done in dollars. If a business plans to earn revenue in dollars, it makes sense to borrow in dollars too.
That way, they avoid currency risk. If they borrowed in their local currency but earned in dollars, exchange rate fluctuations could make loan repayment unpredictable.
There’s also the matter of interest rates. Because the dollar is relatively stable, dollar-denominated loans often come with lower interest rates than local currency loans. So between ease of global trade, lower borrowing costs, and stability, the dollar remains the preferred choice for many international borrowers.
Related: Interest Rates Demystified: From Federal Funds to Your Finances
How Interest Rates and Policy Affect Inflation and the Economy
Governments borrow to finance operations like military spending or social programs, but we often hear talk of adjusting interest rates to “cool down” inflation. How does that actually impact the money supply?
There’s a split in responsibilities. Governments affect money supply through debt issuance — selling bonds — while central banks control the price of money via interest rates. So while the Federal Reserve might be raising rates to tighten the money supply, the Treasury Department could be increasing it by issuing short-term bonds. These two efforts can sometimes pull in opposite directions.
Why do central banks target a specific inflation rate? They want steady economic growth without triggering collapse. If prices rise too fast, the public pushes back — citizens notice their purchasing power dropping and often blame politicians. To manage this, central banks aim for a moderate, controlled increase in prices, usually around 2% annually.
But here’s something important to understand: the Consumer Price Index (CPI) doesn’t actually measure inflation in the true sense — it measures price increases. Inflation, properly defined, is an increase in the money supply.
If the money supply stayed stable while technology continued to advance, prices would naturally fall over time. That would increase purchasing power, and your salary would go further each year.
Central banks don’t want that, because falling prices can lead to reduced spending and lower profits. So they aim for gradual inflation to keep the system running smoothly, but they have to be careful not to push it too far or too fast.
Let’s now connect this to market sectors and individual impact.
Rising inflation and monetary expansion distort interest rates. According to the Austrian School of Economics, these distortions are at the heart of financial instability. Interest rates should reflect real savings.
For example, if people save more gold in a gold-backed system, banks accumulate those reserves and lower the interest rate naturally, because they don’t need to attract more deposits. They can then lend at lower rates, accurately reflecting supply and demand.
But in a manipulated system like today’s, central banks set interest rates arbitrarily, often below natural levels. This misleads borrowers and investors about how much real saving exists in the economy. It leads to overinvestment in certain areas — like real estate or tech — and when those sectors can’t produce real returns, we get crashes like the one in 2008. So inflation and artificial credit expansion don’t just raise prices — they create long-term instability.
Understanding the Illusion of Savings and Its Impact
When banks receive more gold in deposits, they pay savers less to hold it. At the same time, they can lend it out at a lower interest rate since their cost of holding the gold has gone down. This is the basic dynamic in a gold-backed system.
With fiat currencies like the dollar or the euro, which are not backed by tangible assets, the dynamic changes. When new money is printed, it typically ends up in bank accounts. Even if people spend it, the money circulates and is ultimately deposited back into the banking system.
This creates the illusion of increased savings in the economy, even though no new value has been created — no new products, no additional gold mined, no real economic output added. Just more digits in the system.
This illusion of increased savings lowers interest rates artificially. Entrepreneurs see these low rates and assume people are saving more for future consumption. So, they borrow to invest in capital goods — machinery, infrastructure, and other tools for production.
But since the actual pool of savings hasn’t increased, they’re all competing for the same limited resources. Eventually, the prices of these goods rise, and many entrepreneurs can no longer afford them.
At that point, they realize their assumptions were flawed, and the investments stop. That’s when a recession occurs — a correction of the earlier misallocations.
Subjective Value and the Psychology of Markets
Asset prices are relative, and value is subjective. One person might trade $10,000 for a car, while another would pay that same amount for a painting. It depends on personal preferences.
Value isn’t fixed; it’s where a buyer and seller agree that what they’re getting is worth more than what they’re giving up.
In inflationary environments, low interest rates discourage saving. If your savings yield just 0.5% per year, you’ll likely seek higher returns elsewhere. This pushes people toward assets — initially fairly valued, but increasingly overbought.
Over time, recency bias sets in. People justify high prices based on what others recently paid, not on intrinsic value.
This creates bubbles. As long as money supply increases and loans are easy to get, demand remains high. But once banks tighten lending — due to a lack of creditworthy borrowers or growing risk — the money supply contracts.
People must cover debts and living costs, so they start selling assets. That’s when prices fall. Smart investors often see the bubble first and reallocate early, but most follow later, driven by crowd psychology.
Cycles, Asset Inflation, and Investment Perspective
Markets are deeply influenced by psychology, interest rate manipulation, and capital flow across borders. That’s why, for example, U.S. stocks like the S&P 500 have outperformed European counterparts — investor confidence is higher in the U.S. economy.
One consistent trend: asset prices have risen dramatically over the last 20 to 30 years. Stocks, bonds (until 2022), and housing have all climbed. In many countries, homes are now unaffordable for average people. This isn’t due to a population boom — it’s a result of more money in the system chasing the same goods.
Real estate and gold are good examples. Gold was about $20 per ounce a century ago; today, it’s over $3,000. While some argue gold isn’t a perfect inflation hedge and is more reactive to geopolitical events, it still reflects the erosion of fiat currency value over time.
There’s no single best asset. Investors shouldn’t become ideological about one category — whether it’s gold, Bitcoin, or real estate. What matters is understanding how assets relate to each other.
As Michael Maloney pointed out, it’s not just about dollar value — it’s about how much one asset costs in terms of another. For example, how many ounces of gold does it take to buy an average home?
Investing ranges from speculative bets on startups to steady income from quality assets. You don’t have to chase skyrocketing prices. As Warren Buffett said, “Price is what you pay. Value is what you get.” If you buy a quality asset that pays dividends or generates rental income, it can be a good investment — even if its market price doesn’t increase over time.
That’s definitely a complex topic. Alright Ivan, that’s all the questions I have for you today. Thanks for joining me and sharing your insights on inflation, monetary policy, and money in general. Where can listeners find your book or reach out if they have questions?
I’m on LinkedIn — just search for Ivan Pavlovic. I also have a X/Twitter account, though I’m not very active there; the handle is @ivannpvl.
My book Making Money on the Money Printer is available on all Amazon platforms. I won’t go into too much detail about it, but for listeners: the book covers 10 interconnected topics all tied to money and inflation. It’s meant to offer a fast, accessible understanding of some of the most important economic ideas for the next 5 to 10 years — and beyond.
Great, we’ll include those in the show notes. Thanks again, Ivan, and thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
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